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Morgan Stanley: Cyprus-Stupidity Loser (Update 3)

Updated from noon, 1:43 p.m. and 3:14 p.m. EST with further developments in Cyprus, market close informtion, and with comments from Jim Cramer, Credit Suisse economist Helen Haworth, and UBS analyst John-Paul Crutchley.

NEW YORK (
TheStreet) --
Morgan Stanley(MS - Get Report) was the loser among the largest U.S. banks on Monday, with shares down 2.5% to close at $22.99.

Morgan Stanley's shares recovered a bit, after being down over 4% in late morning trading.

Bank stocks led the broad market lower, as investors reacted to the news over the weekend that the government of Cyprus had agreed to charge bank depositors 5.8 billion euros, in order to receive a 10 billion euro bailout package from the European Stability Mechanism and the International Monetary Fund.

Under the agreement, depositors in Cyprus's banks with balances above 100,000 euros would be charged a one-time "stability levy" of 9.9%, while smaller deposits would be charged 6.75%. Most of the affected depositors are from outside the country, reflecting the island nation's status as a tax haven.

With depositors clamoring for their money, the Cypriot government had planned for the island nation's banks to reopen on Tuesday, as negotiations continued over a different bailout package and a possible Russian rescue of certain banks. But
Reuters reported Monday afternoon the banks would remain closed until Thursday -- to stave off an entirely predictable run on deposits -- pending discussion and a vote in parliament, according to an unnamed government source.

The
KBW Bank Index(I:BKX) was down 1% to close at 56.98, which was hardly surprising, considering how unsavory the prospect of any bank run is for investors. All but one of the 24 components of the index were down. Shares of
Citigroup(C - Get Report) -- which derived 16% of core 2012 revenue from Europe and the Middle East -- were down over 2% to close $46.24.

"As elections in Greece and Italy have shown, the risk the economic and financial crisis is exposing is a steady rise in support for new and radical political parties in the periphery, for whom membership of the euro is not a necessity," according to Credit Suisse economist Helen Haworth.

In a report early on Monday, Haworth said "such a trend now looks inevitable in Cyprus."

UBS analyst John-Paul Crutchley in a report on Monday called the proposed bailout of Cypriot banks and the haircut to depositors "a potential game changer," that "creates another leg of uncertainty to the European financial crisis."

Crutchley called the European bailouts of the financial systems in Ireland, Portugal, Greece and Spain "broadly stable," but said that "in the event of the peripheral economies require additional capital, the risk is that a precedent has been set." The European Union has indicated that depositors could take it on the chin in further bailouts, "rather than letting a country's debt/gdp level rise to an unsustainable level," according to Crutchley."

"Clearly this provides a catalyst to start a bank-run at a point when the impact of such is most likely to be catastrophic for the economy involved which, in turn, is likely to make a resolution more challenging," he wrote.

When discussing the
Cyprus situation and a possibly overheated market, Jim Cramer said in an interview on
TheStreet that "this is the other way to get at the money," but that "the bank debt is what should suffer." Cramer also added several questions, that apparently nobody is asking of European officials:

"Where are the regulators? How did these banks ever get so big? How did they get all this hot money? Why were they paying 5% interest?"

It also wasn't surprising to see U.S. Treasury bond prices rallying. The market yield on the 10-year bond was down to 1.95% Monday afternoon, from 2.01% on Friday.

Morgan Stanley

Morgan Stanley's shares have returned 20% this year, following a 28% in 2012. The shares trade for 0.9 times their reported Dec. 31 tangible book value of $26.81, and for 9.1 times the consensus 2014 earnings estimate of $2.54 a share, among analysts polled by
Thomson Reuters. The consensus 2013 EPS estimate is $2.11.

The company on Thursday announced that the
Federal Reserve had approved its 2013 capital plan, which included no dividend increase or share buybacks, but would include the purchase of the remaining 35% stake in Morgan Stanley Smith Barney, still held by Citigroup.

Morgan Stanley's stock is typically among the most sensitive to bad headlines out of Europe. The company reported that as of Dec. 31, its net risk exposure to "European Peripherals," including Greece, Ireland, Italy, Spain and Portugal, totaled $6.3 billion.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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